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Woolworths rally gets interesting

Could it be a case of fifth time lucky?

The strategic challenges facing the Australian supermarkets are well understood. Yet it’s been a great week for supermarket stocks. As I write, Metcash is up 9%; Woolworths 6% and Wesfarmers 3%.  It looks like a looming announcement on the sale of Woolworth’s hardware assets might be creating interest and/or forcing some short covering.

This week’s rally brings the Woolworths chart to an interesting point. It’s arrived at the potential resistance of its 40 week (200 day) moving average. As you can see, this has proved effective resistance on 4 previous occasions during Woolworths’ major down trend.

The moving average is also close to the resistance line of a triangle pattern. The share price has nudged through this today. A bit of a false break on the third test of these triangle resistances is pretty common. I’d want to see Woolies clearly up through the 200 day moving average to be confident this zone of resistance has been broken.

A third rejection of the triangle resistance and a 5th rejection of the moving average would be a bearish chart signal. It might set up for a move below the triangle support around $20.25

A clear break above the 200 day average would on the other hand be a positive development.

Given Woolworths competitive challenges, the upside is likely to be limited until the market gets evidence that it’s starting to stabilise its supermarket profit margins and market share and turn the Big W business around. Until that happens the $24-$25 resistance zone might prove the upper limit of any bullish break above the current resistance.

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